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Income jumps and spending climbs in November

By Steve GoldsteinMarketWatch

WASHINGTON _ Americans saw a jump in personal income in November and, despite spending most of it, still increased their savings levels, according to data released Friday.

The Commerce Department said personal income climbed 0.6 percent in November, the largest gain since February, and consumer spending rose 0.4 percent. Economists polled by MarketWatch had anticipated a 0.4 percent increase in both personal income and consumer spending.

October data on both spending and income saw slight upward revisions.

The Commerce Department said work interruptions caused by Hurricane Sandy helped turn income around. Wages and salaries gained $41.1 billion in November after falling $16.3 billion in October, and the agency said Sandy was responsible for an $18.2 billion decline in October.

The slow but steady gains in employment are also showing up in the data.

Compared to the same month of 2011, personal income was up 5.1 percent _ the best improvement in five years _ allowing spending to rise 5 percent compared to the same time period, which also was the best gain in five years.

Those gains weren't eaten up by inflation, either. Real disposable income rose 0.8 percent on the month, and real spending gained 0.6 percent.

That's because an inflation measure the Federal Reserve uses to set interest-rate policy, the PCE price index, fell 0.2 percent in November. The year-on-year rise of 1.4 percent represents a slowing from the 1.7 percent in October, and is a good deal away from the Fed's 2 percent longer-run inflation target, not to mention the 2.5 percent medium-term target the central bank is using as a threshold for lifting interest rates even if the jobless rate does not come down.

Falling gasoline prices were the main reason for November's inflation decline, but even the so-called core measure excluding food and energy saw year-on-year gains slow to 1.5 percent from 1.6 percent.

The lack of inflation means the Fed will be free to keep interest rates near zero and continue buying bonds to spur more economic growth.

The low interest rates didn't deter savings from improving in November, rising to 3.6 percent from 3.4 percent in October.

The personal income report joins a list of reports released this week which were surprisingly strong, including November home sales and durable-goods orders, and the December reading of the Philly Fed manufacturing index.

"The upshot is that it now appears that fourth-quarter real consumption is on course to increase by as much as 2.0 percent. We previously had 1.5 percent penciled in, and business investment in equipment and software, which we had assumed would contract, may now post a modest gain," said Paul Ashworth, chief U.S. economist at Capital Economics.

"As a result, we now estimate that fourth-quarter GDP growth will be between 1.5 percent and 2.0 percent."

The question raised is whether the November strength will extend into December. Consumer confidence was strong in November before slipping back this month on fears about the fiscal cliff, the series of tax increases and spending cuts due to hit the economy unless legislative action is taken.

On Thursday night, the House of Representatives cancelled a vote on the so-called Plan B, which would have extended current income-tax rates for 99 percent of Americans into next year.___(c)2012 MarketWatchVisit MarketWatch at www.marketwatch.comDistributed by MCT Information Services